CloudU – Sunk Costs Are Just That, Sunk. Forget ‘Em

CloudU Notebooks is a weekly blog series that explores topics from the CloudU certificate program[1] in bite sized chunks, written by me, Ben Kepes, curator of CloudU. How-tos, interviews with industry giants and the occasional opinion piece are what you can expect to find. If that’s your cup of tea, you can subscribe here[2].

Given the exposure I have online, it’s not surprising that my blog posts or other content often come up when people are searching for a particular answer to a question – this often leads to emails and phone calls from technology users who are looking for advice around some buying decisions they need to make. Hardly a week goes by without me spending time talking to end users and giving them the benefit of my perspective.

Recently, I was contacted by a financial services company that was looking to validate its technology strategy and wanted some independent advice. It’s always fascinating for me to talk to end users, so I spent a bunch of time talking with this organization and hearing about its issues. These conversations reminded me of the real issues that organizations have around sunk costs.

I can’t get into the confidential details, but suffice it to say that this particular organization has spent the past two years trying to implement a highly complex and highly proprietary solution to manage its financial transactions. When the organization was sold the solution it was promised that the solution would provide the extensibility and flexibility to really meet the organization’s needs. The ensuing 24 or so months involved a raft of consultants — a significant proportion of the organization’s total workforce — working on bug after bug simply trying to get core functionality out of the system. And the marketing department’s dreams of trying to automate campaigns and other marketing initiatives was totally outside of the realm of possibility.

My initial thought when looking at the scope of what this organization wanted to do was that a rich cloud-based CRM system with sufficient flexibility and customization options would likely fill all of the core needs, with the added advantage that it would likely be readily integrated with external marketing tools to really increase the organization’s agility. I put this to the company, suggesting that it should scope out replacing the existing system with something more appropriate. While admitting that this was probably a solution, said company told me that anyone who suggested end-of-lifeing its existing system before it had delivered a return on its significant investment would likely be shot – I figured that was an exaggeration but knowing IT departments, maybe not.

This is a perfect example of the sunken costs conundrum; the situation that stops change when it requires a move away from products or processes that have taken capital expenditure to set up. It stems from a reluctance to “throw good money away” and walk away with what, in the case of IT projects, can be significant investments.

Classic economics states that sunk costs, or costs that have already been incurred, should not affect decision making. However business decisions aren’t always rational, as we all know. It’s frustrating (albeit understandable) from the outside to see an organization deny itself a strong competitive advantage, and a great opportunity to innovate, all because of a wrong buying decision a couple of years ago.

So how are we best to deal with the sunk costs conundrum as it relates to cloud computing? In situations like this, it may make sense for organizations to look to a gradual move to the cloud. In the example I’m using, an approach that sees greenfield development, new applications or excess capacity delivered from the cloud can be seen as appropriate. Perhaps doing the client facing marketing activities (newsletters, email campaigns, social applications, etc.) in the cloud would be a good start – both to test the cloudy waters, but also to avoid stressing an already brittle on-premise system.

Sunk costs are a fact of life when it comes to technology. While in an ideal world they would in no way impact buying decisions, the reality is that they do. Organizations need to look at solutions that allow them to both make the most of existing investments and still achieve the particular benefits that cloud solutions can bring them